The Generation War Goes on Parade

Paul Taylor, a vice president at Pew and the author of a new book on generational conflict, took his generation war story to Parade Magazine this weekend. This magazine, which is distributed to millions of people with their Sunday paper, included a piece by Taylor that warned:

"By the time every boomer is collecting Social Security and Medicare, those two programs are projected to eat up about half our entire federal budget—and both the Social Security trust fund and one of Medicare’s two trust funds will be broke. That’s because the ratio of taxpayers to retirees will have fallen to its lowest level ever, about 2 to 1. (When Social Security first went into effect, the ratio was more than 20 to 1.) But renegotiating the social contract between the generations will be a tall order, because these days, young and old in America don’t look alike, act alike, or vote alike."

This comment is fundamentally misleading. First, the ratio of taxpayers to retirees at the time Social Security started has nothing to do with the time of day. Amazon had only a few thousand customers in the first months it was operating. So what?

When Social Security was first created its actuaries knew full well that life expectancies would increase and that the ratio of workers to retirees would decline, and they adjusted the program accordingly. This was done primarily through a series of tax increases that were scheduled decades in advance. In addition, the commission chaired by Alan Greenspan in 1983 increased the age at which workers qualify for full benefits from 65 to 67. This increase is phased in over the period from 2002 to 2022. It is remarkable that Taylor seems unaware of these facts.

While the program is still projected to face a shortfall over its 75-year planning horizon, close to half of this shortfall is attributable to the upward redistribution of income over the last three decades. This upward redistribution has worsened the finances of the program in two ways.

First, it increased the portion of wage income that went to workers who earned more than the wage cap. In 1983, when the Greenspan commission set the cap at its current level (which is indexed to average wages), only 10 percent of wage income was above the cap and escaped taxation. Now it is close the 18 percent of wage income.

The other way in which the upward redistribution hurt the finances of the program was that it increased the ratio of payouts to taxes because of the progressive nature of the program's benefit structure. With the typical worker's pay falling relative to the overall average wage, because so much money is going to high-end earners, their replacement ratio (the portion of their wages replaced by their benefit) is rising. This is good in that it protects workers, but it does impose larger costs on the program.

The other important point about the upward redistribution we have seen over this period is that the money that workers have lost due to the redistribution to people like doctors, Wall Street types, and the Koch brothers dwarfs any potential tax increases that could be needed to finance Social Security. The Social Security Trustees project that average hourly compensation will rise by more than 50 percent over the next three decades.

The prospective increase in compensation is more than ten times the size of any possible tax increase that would needed to keep Social Security fully financed well into the next century. If the upward redistribution of the last three decades continues, it will make far more difference to the living standards of young workers than paying for their parents' Social Security. It is therefore striking that Parade would opt to make such a big deal out of an issue that is likely have minimal impact on the well-being of young people. (The impact of global warming, if left unaddressed, will also swamp the impact of any prospective Social Security tax increases.)

The finances of Medicare are notably worse than Social Security, but this is due to the fact that people in the United States pay more than twice as much per person for our healthcare as people in other wealthy countries without anything to show for it in terms of outcomes. These high costs are due to the fact that our doctors make twice as much as doctors in other wealthy countries, and we pay twice as much for our drugs, medical equipment, and other medical goods and services.

Here also the issue is not a generational one, but rather one of reducing the enormous waste in our health care system. Of course this waste largely goes to enrich those at the top.